One of our favorite methods of equity stripping is via LLC capitalization, a method developed to rectify the shortcomings of other equity stripping programs. The concept goes like this: two people form a Limited Liability Company (LLC) in order to run a business (which could be some legitimate, yet easy-to-do activity such as investing in stocks and bonds.) Under the LLC Acts of every state, each member (member being the LLC equivalent to partner) can obligate the other, per a written agreement, to contribute capital (assets) to the company so that it has a means to operate. One of the members contributes a smaller amount of assets up front to capitalize the company, in exchange for a small but significant ownership interest (usually 1-5%). The other member promises to make a large capital contribution over time, in exchange for an upfront large interest in the company (95-99%). Because the first member contributed his capital up front, but the second one did not, the 1st member has a valid reason for making sure the 2nd member makes good on his promises. Therefore, the LLC places a lien on the second member’s property to ensure he fulfills his obligation to capitalize the LLC over time. As long as the LLC is not considered an insider under applicable fraudulent transfer law, and the obligation is valid, its fulfillment demonstrable, and it “makes sense” in a business context, a rock-solid lien has been created on the 2nd member’s property.

It’s important to note in this scenario that Member 2’s promised contribution could take many forms. It could be a promise to contribute cash, services, equipment, or other property. And after the lien expires, the members could dissolve the LLC and typically all returns of capital will revert back to them tax free. Furthermore, almost any type of asset could be equity stripped via this method, whether it be A/R, real estate, or personal property. Indeed, the flexibility of equity stripping via LLC capitalization is so great, that practically any type of asset could be protected, according to practically any terms that fit within the realm of normal business practice.